By Sinead Carew

NEW YORK (Reuters) - Verizon Communications may have the iPhone, but the blockbuster smartphone has yet to pay off in its battle against AT&T Inc.

In the second quarter, Verizon Wireless, the No. 1 U.S. mobile service, signed up 1.3 million fewer iPhone customers than AT&T, dashing high hopes of investors who sent its shares down almost 3 percent.

On top of this, Verizon Wireless customers spent less per month than expected as the company changed its data service price plans, further disappointing Wall Street on Friday.

While Verizon Wireless added three times more net subscribers in the quarter than AT&T, it only activated 2.3 million Apple Inc iPhones compared with 3.6 million activations at AT&T.

"AT&T has done a much better job of hanging on to iPhone customers than anybody expected," said Credit Suisse analyst Jonathan Chaplin.

There was simply not enough good news in the report to justify Verizon's richer valuation than AT&T's, said Chaplin, who said Verizon shares have been trading at about 14 times 2012 earnings estimates compared with AT&T's 12 multiple.

Verizon Wireless' 1.9 percent growth in average monthly revenue per user (ARPU) was well behind Chaplin's expectation for 2.9 percent.

"Without the share gain in the smartphone category driving the ARPU, which would drive earnings per share growth, it's difficult to get enthusiastic about the (Verizon) shares at this valuation," Chaplin said.

AT&T may leapfrog Verizon Wireless and become the top U.S. mobile service next year if regulators approve its plan to buy Deutsche Telekom unit T-Mobile USA.


And while the subscriber numbers were strong on the surface "they were the wrong kind of subscribers," Chaplin said. Subscribers using devices such as the iPhone spend more on data services on a monthly basis than other wireless customers.

Verizon Wireless said it would now take it a quarter longer than expected to increase its smartphone user base to 50 percent of is subscribers. It blamed the delay on the launch of the next iPhone a quarter later than it had expected. Verizon said it now expects to sell the next version of iPhone in the autumn.

Still, Verizon Wireless, owned by Verizon and Vodafone Group Plc, added 1.3 million net subscribers in the quarter compared with the average expectation for about 930,000, according to seven analysts contacted by Reuters.

Stifel Nicolaus analyst Chris King was impressed with Verizon's customer growth and its sale of 1.2 million high-speed wireless devices for the new 4G network it is building.

While some investors had worried that the relatively expensive iPhone would hurt Verizon's profit margins, King said its wireless service margin of 45.4 percent was well ahead of his expectation for 43.9 percent.

Verizon's quarterly profit was $1.61 billion, or 57 cents a share and was ahead of the average analyst estimate of 55 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 2.8 percent to $27.53 billion, ahead of Wall Street expectations for $27.42 billion.

Also on Friday, Verizon named Chief Operating Officer Lowell McAdam as chief executive, starting August 1. McAdam, the former CEO of Verizon Wireless, is replacing Ivan Seidenberg, who will remain chairman. The move follows its succession plan announced late last year.

Seidenberg has led Verizon since its inception in 2000 and before that he was CEO of Verizon's predecessor companies. The executive, who started out as a cable splicer's assistant at New York Telephone, has worked at the company for more than 40 years.

Verizon shares were down $1.06 or 2.8 percent at $36.51 in morning trading on the New York Stock Exchange, after falling as much as 3 percent shortly after the market opened.

(Reporting by Supantha Mukherjee in Bangalore and Sinead Carew in New York; Editing by Joyjeet Das, Derek Caney and Phil Berlowitz)

Source: Reuters US Online Report Internet News